While technology may have captured the headlines, gold has been the other notable success story of 2024. Fuelled by geopolitical tensions, and worries over the burgeoning US deficit, the gold price has hit new highs.
This is in spite of real yields and the US dollar remaining high, usually negatives for gold. But with a notable wobble over the past few weeks, could the party be about to come to an end?
Gold remains relatively lightly used among discretionary fund managers. The quarterly ARC Market Sentiment Survey found that 75% of managers had either no gold exposure or less than 2.5%. No manager had exposure above 10%.
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However, Graham Harrison, chairman at ARC, said: “An investigation of the changes in net sentiment over time displayed by discretionary investment managers to gold reveals a strong correlation with the performance of gold over the previous 12-month period.”
This pattern suggests discretionary fund managers could be about to turn more positive on the asset class. Equally, while the gold price has run up a long way, there are still supportive factors for gold.
George Lequime, manager of the Amati Strategic Metals fund, said: “The big driver in the past two or three years has been a massive pickup in central bank buying. Partly that’s been related to heightened geopolitical tensions, especially in the Middle East and Ukraine. Central banks in countries such as China, Turkey and India have increased the level of gold in their reserves.”
This is still happening. In its latest report, the World Gold Council said central bank buying slowed in the third quarter, but demand remained robust at 186t. Year-to-date central bank demand reached 694t, in line with the same period of 2022. Geopolitical tensions continue to be acute, and may accelerate with a new Trump administration starting in January. This should support demand.
Another factor to consider may be the incoming US administration’s tax, tariffs and deregulation agenda. The consensus is that this may be inflationary. Gold is often seen as an inflation hedge, though the strongest correlation has been during periods of hyper-inflation when investors start to have real fears over the value of their savings.
Nitesh Shah, WisdomTree’s head of commodities and macroeconomic research, said that until recently investors had come back into gold exchange traded commodities (ETCs) after close to two years of selling between May 2022 and May 2024.
“Since May 2024, there have been approximately 3 million troy ounces of flows into ETCs (i.e. a 3.7% increase), worth $7.8bn (using gold prices as of 10/10/2024),” said Shah.
However, there are also reasons for caution. On the negative side, the gold price has moved a long way, and investors appear to be growing increasingly cautious. The uptick in ETC interest reversed in November, when they saw outflows of $2.1bn. This may have been the Trump effect, which brought a surge in demand for ‘risk on’ assets such as bitcoin and the dollar, but it still should give investors pause for thought.
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The appreciation in the dollar is particularly worrying for gold bugs. Although WisdomTree believes dollar depreciation pressure is already pent-up – and Trump himself has said he wants the dollar to fall – that is not the early signs from the market. The twin deficits should already been exerting pressure on the dollar, but it remains stubbornly strong, and this could continue if Trump enacts his agenda.
If, as is widely expected, the Federal Reserve cuts rates again, and real yields drop, this would be bad for gold. While Trump’s policies are expected to be inflationary, he has seen how the US electorate treated the last administration that presided over ever-higher inflation and may curb his ambitions for, say, tax cuts.
Gold produces mixed feelings from multi-asset managers. David Coombs, head of multi-asset investments at Rathbones, had been holding gold through the iShares Physical Gold ETF, but has been selling it down as the price has risen.
“The yellow stuff hit a record high of $2,787 a troy ounce in October and has remained elevated since. In context, that’s 35% higher than where it started the year and 84% higher than the eve of the pandemic,” he said.
He said while it can be useful to hold a small allocation as insurance against periods of weakness in financial markets, he sees better value in government bond markets and believes locking in yields of 4-5% before the Fed cuts rates again makes more sense.
“Markets that price future interest rates give a 75% chance that the Fed will cut by 25 basis points again when it meets on 17-18 December,” Coombs added.
Rob Burdett, head of multi manager at Nedgroup Investments, is more comfortable with holding gold, saying it still has favourable demand/supply characteristics, can offer diversification and has the potential to offset geopolitical and inflation risks.
WisdomTree’s internal gold model has a forecast of $3,030 for gold by the third quarter of 2025, assuming the consensus economic forecasts hold true. In a bull case, where inflation remains relatively high, but the Federal Reserve continues to cut rates, gold could reach $3,360/oz. In a bear case, where the Federal Reserve doesn’t cut, or even raises rates, gold could fall back to $2,440/oz over the same period.
Amati’s Lequime pointed out investors do not have to buy the gold price. Gold mining companies are, in his view, as cheap as they have been in his lifetime in spite of the rising price. This is particularly true for small and mid cap mining companies. They would usually outpace the gold price, but instead have lagged.
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He said: “It’s because we’re fighting against other asset classes that are doing well. The million dollar question is what’s going to take for capital to come back into the sector? And partly, you need other asset class to really underperform and for there to be a pull back in the broader markets.”
After a year in which equity markets have soared, but been led by a narrow range of expensive technology companies, a pull back of this kind is not implausible. It’s been a good run for gold, but predicting its trajectory from here is considerably tougher.
This article originally appeared in our sister publication, PA Adviser
